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China's new securities regulator has a tough job ahead after market rout

Mon, Feb 22, 2016 - 10:06 AM

Liu Shiyu is assuming oversight of the world's second-largest stock market in the wake of a US$5 trillion rout that left his predecessor criticized for mismanagement.

PHOTO: EPA

[SINGAPORE] Liu Shiyu is assuming oversight of the world's second-largest stock market in the wake of a US$5 trillion rout that left his predecessor criticised for mismanagement.

As well as needing to rebuild morale among the nation's 99 million investors, Mr Liu will preside over an overhaul of initial public offerings, the planned expansion of a trading link with Hong Kong and a campaign to get the nation's shares included in MSCI's global indexes.

"China faces a confidence crisis after the recent stock market turmoil, stoked to a large extent by policy flip flops," said Vasu Menon, Singapore-based vice-president for wealth management reasearch at Oversea-Chinese Banking Corp.

"International investors will wait to see if he can deliver fresh policies to stabilize the stock market with a steady hand without backtracking on market liberalisation."

Under Mr Xiao, looser controls over leverage helped triple the value of Chinese equities to US$10 trillion before share prices collapsed last summer.

The plunge reverberated across global financial markets and triggered unprecedented state intervention as the government sought to prevent the turmoil from spreading to an economy already growing at its slowest pace in 25 years.

Mr Liu was previously chairman of Agricultural Bank of China Ltd, the nation's third-largest lender, and was a deputy governor at the People's Bank of China (PBOC) before that.

Prior to joining the PBOC, Liu worked at China Construction Bank Corp and the nation's economic reform commission. He holds a master's degree from the economic management school of Tsinghua University in Beijing.

Mr Liu has played a significant role in developing China's bond market, and should be a better steward of the securities industry than Mr Xiao, according to Xia Chun, a senior finance lecturer at the university of Hong Kong. Both are seen as quite conservative toward new developments in financial markets, he said.

For Bocom International Holdings Co and Partners Capital International Ltd, Mr Liu's appointment may buoy the market in the short term as investors anticipate supportive policies.

The Shanghai Composite Index had its best stretch in 2016 last week, rallying 3.5 per cent, and a gauge of 100-day price swings has fallen to its lowest level since June. Even so, the benchmark gauge is down 19 per cent this year, with losses surpassed only by Italy and Greece.

"The situation is not very stable," said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities Ltd.

"The CSRC must regulate without overly protecting the market."

One of Mr Liu's most important tasks will be to oversee the introduction of a more market-based registration system for initial public offerings, expected to be unveiled later this year.

The new regime would leave the questions of IPO supply and timing to companies and the market, rather than the CSRC, and give firms more power to determine pricing.

Investors are still awaiting an exchange link between Hong Kong and Shenzhen, modeled on the Shanghai one that began in November 2014. MSCI has said that giving foreigners more access to China's second-largest equity market, home to many of its small technology companies, is key to getting the nation's stocks included in global gauges.

The index compiler refrained from taking that step in June, saying China still needed to make shares easier for foreign investors to access. The decision came before the summer rout spurred state intervention that was criticized by global asset managers.

Mr Xiao last month acknowledged mistakes after a review of the turmoil. An immature bourse and participants, incomplete trading rules, an inadequate market system and an inappropriate regulatory system were to blame and regulators will learn from the experience, he said.

In one of the most high-profile missteps, the CSRC scrapped circuit breakers in the same week it introduced them. The implementation of the system in January, which was meant to reduce volatility, had the opposite effect as investors panicked at the prospect of not being able to sell their shares.

"The circuit breaker system was the last straw," said Dai Ming, a fund manager at Hengsheng Asset Management Co in Shanghai.

"Xiao does not have a very thorough understanding of the stock market."

Mr Xiao oversaw the development of index futures and options, margin financing and the equity link with Hong Kong, while the stock market is still almost twice the size it was when he took the helm.

Mr Liu's "challenge is to roll out the registration-based IPO system to let the stock market become an even more efficient financing instrument," Mr Hao said.

"Also the securities law will need some improvement for a fairer and more transparent market."

For now, shareholders will be looking to Mr Liu to balance the interests of the state with the opening up of the US$5.6 trillion market, while attempting to restore morale among the individual investors who account for more than 80 per cent of trading.

"It's a huge challenge to soothe the fragile investor sentiment," said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research.

"For the longer term, how to press ahead with the policy initiatives and deepen reforms in a sustained and stable manner remains a big challenge."